House prices, capital inflows and macroprudential policy

Mendicino, Caterina and Punzi, Maria Teresa (2014) House prices, capital inflows and macroprudential policy. Journal of Banking and Finance, 49. pp. 337-355. ISSN 0378-4266

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This paper evaluates the monetary and macroprudential policies that mitigate the procyclicality arising from the interlinkages between current account deficits and financial vulnerabilities. We develop a two-country dynamic stochastic general equilibrium (DSGE) model with heterogeneous households and collateralised debt. The model predicts that external shocks are important in driving current account deficits that are coupled with run-ups in house prices and household debt. In this context, optimal policy features an interest-rate response to credit and a LTV ratio that countercyclically responds to house price dynamics. By allowing an interest-rate response to changes in financial variables, the monetary policy authority improves social welfare, because of the large welfare gains accrued to the Savers. The additional use of a countercyclical LTV ratio that responds to house prices, increases the ability of borrowers to smooth consumption over the cycle and is Pareto improving. Domestic and foreign shocks account for a similar fraction of the welfare gains delivered by such a policy. (authors' abstract)

Item Type: Article
Additional Information: The work on this paper is part of FinMaP (Financial Distortions and Macroeconomic Performance, contract no. SSH.2013.1.3-2), funded by the EU Commission under its 7th Framework Programme for Research and Technological Development. We thank Filipa Sá, Dominik Supera, Punnoose Jacob, Katrin Rabitsch, Jerome Vandenbussche, Frank Warnock and seminars participants at the Banco de Portugal, Nottinhgam University Malaysia Campus, Reserve Bank of New Zealand, Vienna University of Economics and Business and at the IFABS 2013 Conference for valuable comments and suggestions. Maria Teresa Punzi gratefully acknowledges the Banco de Portugal for the 2013 visiting research grant. The views expressed in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Eurosystem or of the Bank of Portugal. Any errors or omissions are the responsibility of the authors.
Keywords: House prices / Financial frictions / Global imbalances / Saving glut / Dynamic loan-to value ratios / Monetary policy / Optimized simple rules
Classification Codes: JEL C33, E51, F32, G21
Divisions: Departments > Volkswirtschaft
Version of the Document: Published
Variance from Published Version: None
Depositing User: ePub Administrator
Date Deposited: 11 Sep 2014 13:34
Last Modified: 15 Jul 2020 15:49
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